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On the Rand: Determinants of the South African Exchange Rate

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  • Jeffrey Frankel

Abstract

This paper is an econometric investigation of the determinants of the real value of the South African rand over the period 1984-2006. The results show a relatively good fit. As so often with exchange rate equations, there is substantial weight on the lagged exchange rate, which can be attributed to a momentum component. Nevertheless, economic fundamentals are significant and important. This is especially true of an index of the real prices of South African mineral commodities, which even drives out real income as a significant determinant of the rand's value. An implication is that the 2003-2006 real appreciation can be attributed to the Dutch Disease. In other respects, the rand behaves like currencies of industrialized countries with well-developed financial markets. In particular, high South African interest rates raise international demand for the rand and lead to real appreciation, controlling for a forward-looking measure of expected inflation and a measure of default risk or country risk. It is in the latter respects, in particular, that the paper hopes to have improved on earlier studies of the rand.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13050.

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Date of creation: Apr 2007
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Publication status: published as Jeffrey Frankel, 2007. "On The Rand: Determinants Of The South African Exchange Rate," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 425-441, 09.
Handle: RePEc:nbr:nberwo:13050

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  1. Ricardo J. Caballero & Guido Lorenzoni, 2007. "Persistent Appreciations and Overshooting: A Normative Analysis," NBER Working Papers 13077, National Bureau of Economic Research, Inc.
  2. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  3. Janine Aron & Ibrahim Elbadawi, 1999. "Reflections on the South African rand crisis of 1996 and its consequences," CSAE Working Paper Series 1999-13, Centre for the Study of African Economies, University of Oxford.
  4. Michael B. Devereux & Charles Engel, 2007. "Expectations and Exchange Rate Policy," Working Papers, Hong Kong Institute for Monetary Research 062007, Hong Kong Institute for Monetary Research.
  5. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
  6. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers, International Monetary Fund 03/44, International Monetary Fund.
  7. Janine Aron & Ibrahim Elbadawi and Brian Kahn, 1997. "Determinants of the real exchange rate in South Africa," Economics Series Working Papers, University of Oxford, Department of Economics WPS/1997-16, University of Oxford, Department of Economics.
  8. Hildegunn Ekroll Stokke, 2006. "Resource Boom, Productivity Growth and Real Exchange Rate Dynamics - A dynamic general equilibrium analysis of South Africa," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 7206, Department of Economics, Norwegian University of Science and Technology.
  9. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 133-53, March.
  10. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 201-18, March.
  11. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sean J. Gossel & Nicholas Biekpe, 2012. "The nominal rand/dollar exchange rate: before and after 1995," Studies in Economics and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 29(2), pages 105-117, June.
  2. Elena Dumitrescu & Rabah Arezki & Andreas Freytag & Marc Quintyn, 2012. "Commodity Prices and Exchange Rate Volatility," IMF Working Papers, International Monetary Fund 12/168, International Monetary Fund.
  3. Frankel, Jeffrey A., 2012. "The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions," Scholarly Articles, Harvard Kennedy School of Government 8694932, Harvard Kennedy School of Government.
  4. Mehmet Balcilar & Rangan Gupta & Charl Jooste, 2014. "Is the Rand Really Decoupled from Economic Fundamentals?," Working Papers, University of Pretoria, Department of Economics 201439, University of Pretoria, Department of Economics.
  5. McKenzie, Rex & Pons-Vignon, Nicolas, 2012. "Volatile Capital Flows and a Route to Financial Crisis in South Africa," MPRA Paper 40119, University Library of Munich, Germany.
  6. Rodrigo Caputo & Mariel Siravegna, 2014. "RER Appreciation After the Great Recession: Misalignment or Fundamental Correction?," Working Papers Central Bank of Chile, Central Bank of Chile 718, Central Bank of Chile.
  7. Isaacs, Gilad, 2014. "The myth of “neutrality” and the rhetoric of “stability”: macroeconomic policy in democratic South Africa," MPRA Paper 54426, University Library of Munich, Germany.
  8. Balazs Egert, 2012. "Nominal and Real Exchange Rate Models in South Africa: How Robust are they?," CESifo Working Paper Series 3853, CESifo Group Munich.
  9. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2010. "Pricing the Currency Premium Under Flexible Exchange Rates: Evidence from South Africa," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(60), pages 7-52, October -.
  10. Rodrigo Caputo & Miguel Fuentes, 2012. "Government Spending and the Real Exchange Rate: a Cross - Country Perspective," Working Papers Central Bank of Chile, Central Bank of Chile 655, Central Bank of Chile.

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